Information on Seeking Financing and What Financing is Available….
Property development is a growing industry – more and more individuals are finding their dream jobs in this profession and searching for the perfect project to call their own. Once a development project has been found, one of the first things that should be accomplished is raising the funds to purchase the property and fund the development.
Securing funding for this type of project is not always easy but, if the project is well-planned and the profit margin is appealing, there are lenders out there who are willing to consider these projects and happily finance them.
Treat Property Development as a Business
One of the most important things to remember when beginning a career in property development is that this field is truly a business. Businesses exist to make their owners money – this should be your primary focus when dealing in this industry. This means continually checking and rechecking plans, managing costs, and keeping projected timelines on track to make sure the project will continue to yield the predicted profit so you can get paid.
Property development is not as glamorous as the television shows make it seem – it is a business and it is hard work. Time to stop dreaming and start working!
Draft a Business Plan
Like beginning any other business endeavour, it is important to draw up a business plan for a property development project. This is a key element in securing the financing needed to make the project a reality – lenders will look closely at this document to determine if they will finance the project.
Also, remember that a business plan is not just for your new profession overall – a business plan should be in place for every property or every project you plan on undertaking. No two projects are exactly the same, so having separate business plans will help to cover each property’s unique needs and challenges.
When developing a business plan, make sure to write down all of the items that are found on the property. Keeping a written log of findings will help to clarify thinking as well as capture all pitfalls and highlights of the project. Make sure to include details of the area, why the property should be purchased, comparable properties in the same market, and demand for those properties in the community.
A great way to gather information on the latter two items is by researching sales prices of properties in the area and working with local real estate agents to find out more information.
Capture All Potential Costs
When it comes to calculating the costs of a property development project, the most important rule is to capture the costs as they truly are and not through rose colored glasses – this means that you should not fudge the numbers to make yourself or a potential lender feel more comfortable with the price tag.
This is also important for making sure that the project will indeed turn a profit because there is no point in doing a project where you will be working for free. Although a project may seem like a great opportunity, it is possible to spend more renovating a property than it is actually worth.
Gathering information on the costs of a project is vitally important in making sure all the potential expenses are being captured. Get quotes from organizations that will do the work, the interest and fees associated with securing financing as well as the cost to buy and sell the property.
Doing this will help to paint a better picture of what the project actually costs compared to the profit potential it holds. Also remember to factor in your own living expenses – many project developers take their wages when the project is done, so funds will need to be available to live off of while the project is happening.
Once the business plan has been created and costs have been calculated, it is time to begin seeking investors to finance the project. This is where all the preliminary work that was done to plan for the project will come into play. The business plan that is presented to these individuals or organizations should be simple to understand and highlight both the key features and key costs of the project.
There are a number of places in which a property developer can find funding for a project – specialist mortgage brokers, large banks, or family and friends.
Specialist development mortgages are available to finance property development and can be obtained through a specialist mortgage broker.
These can be arranged through a specialized mortgage broker or a specialist development bank. Make an appointment with the appropriate party and present them your business plan. Once they have reviewed the project, costs, and potential profit they will either grant or deny financing. High street banks are available for financing, but it may be difficult to secure.
Make an appointment with your local bank manager and present the project to them to try and secure funding. Property developers also have the option of asking family and friends to help fund their project.
Individuals who are close to you may be more willing to lend – the most important thing to remember, however, is that even if your aunt finances the project, her funding should still be treated as a business agreement with a repayment or profit sharing plan.
Another option is what is known as a joint venture. Joint ventures occur when two or more people collaborate and combine financial backing to manage and fund a project. More often than not, these types of agreements are based on a mutual profit share.
Using Property Development Finance
As mentioned earlier, high street banks are not as willing to finance property development projects. Although this may be discouraging, there are still a number of commercial lenders who are willing to participate. Even though the requirements for this kind of financing are strict, the loan to values are the same as they have always been – commercial property development finance is expensive but available.
Considering lenders usually seek the same financial commitment from the applicant as they are willing to extend, it would be a safe bet to add between five and six percent to the loan value in overall costs.
There are also fees associated with financing a property development project with a commercial lender.
Some of these additional costs include a setup fee, exit fee (which is linked to the Gross Development Cost or GDV), introduced fee, survey, and legal fees. Some lenders will also charge a fee based on a percentage of the facility. When looking into this type of financing, make sure to keep all of these additional charges in mind – this is why a property developer needs to be undoubtedly sure they have priced the project properly and that it will indeed turn a profit in the long run.
What is Needed for Property Development Finance?
Lenders generally want to see a financial commitment from developers to show that they are in the project for the long haul. This being said, lenders may require developers to either own the property already or have recently purchased the property with their own funds – this shows that they are willing to take a risk just like the lender is.
If a lender is very invested in the project, they may opt to pay up to 50 percent of the property’s cost. In most circumstances, however, lenders may only finance between 50 and 60 percent of the entire development project, which is released in up to five different stage payments.
Lenders also look closely at the location of the property that is planned to be developed. Some lenders will even decline financing a project based on the geographical location alone. It is important to research lenders that favor the area of your project.
If it is apparent that a certain lender will only finance projects south of a city and your particular project is north of a city, it would not be pertinent to waste time applying for financing with that organization. It is important for developers to leverage the opportunities available to them in order to secure the best possible financing option.
When starting out in the property development industry, there are a few key principles that need to be remembered – first, treat property development as a business including creating a detailed business plan. Secondly, make sure to capture any and all costs associated with the project before seeking financial support – this will also help to calculate the projected profit for the project.
Finally, make sure to research and understand the financing options that are available to developers. Although not all financing options are ideal, there are different ways in which you can find funding for your project.